Next up comes 1.1200

• EUR/USD challenged 1.1100 amid renewed selling pressure.
• The dollar bounced back sharply and kept the pair under control.
• Germany’s headline inflation rate will be published on Thursday.

EUR/USD faced renewed and quite marked downward pressure on Wednesday, dropping all the way to retest the 1.1100 area amid the US dollar’s (USD) robust turnaround.

In fact, the greenback regained its balance after Tuesday’s decline from recent 2024 lows near 100.50 when tracked by the US Dollar Index (DXY). The US dollar’s firm performance came despite mixed US yields across the curve and a decline in German 10-year yields.

Meanwhile, investors remained alert to the possibility of an interest rate cut by the Federal Reserve (Fed) in September, following Chairman Jerome Powell’s suggestion that it might be time to adjust monetary policy. Powell also noted that the labor market is unlikely to add to inflationary pressures any time soon and emphasized that the Fed does not want further cooling in labor market conditions.

In line with Powell’s remarks, Federal Reserve Bank of San Francisco President Mary Daly said Monday that “the time has come” to cut rates, echoing Powell’s sentiments from the previous week. However, she noted that the size of the initial rate cut would depend on future data.

Reflecting these potential rate cuts, CME Group’s FedWatch tool shows a nearly 63% probability of a 25bps cut at the September 18 event.

As for the European Central Bank (ECB), its latest accounts showed that while policymakers saw no immediate need to cut interest rates last month, they warned that the issue could be revisited in September , due to the continued impact of high rates on economic growth.

Board member Klass Knot suggested on Tuesday that the ECB could gradually cut interest rates if inflation continues to fall, although he stressed the need for more data before deciding on a potential cut in September. He pleaded for a cautious approach, indicating that while there may be a case for easing the policy, a final decision has yet to be made.

In short, if the Fed opts for further or higher rate cuts, the policy gap between the Fed and the ECB may narrow over the medium to long term, potentially boosting EUR/USD, especially as markets anticipate the ECB to cut twice more much rates. year.

However, over the longer term, the US economy is expected to outperform Europe, suggesting that any prolonged dollar weakness may be limited.

In addition, further gains in the euro seem supported by position size. Net long euro positions rose to levels not seen since early June, according to the CFTC’s latest report, indicating continued bullish sentiment among speculators. Meanwhile, commercial traders (hedge funds) maintained their net short positions, with contracts hitting multi-week highs. EUR/USD started a strong recovery in the period under review, decisively breaking the psychological barrier of 1.1000 and setting new annual highs, driven by the renewed and significant decline of the US dollar.

Looking ahead, Germany will focus on the calendar this week with the release of retail sales, the advanced rate of inflation and the labor market report. In the wider euro area, the skyrocketing inflation rate will also attract attention.

EUR/USD daily chart

EUR/USD short-term technical outlook

Further north, EUR/USD is expected to challenge its 2024 peak of 1.1201 (August 26), which comes ahead of the 2023 peak of 1.1275 (July 18) and the 1.1300 round level.

The pair’s next downside target is the weekly low of 1.0881 (August 8), ahead of the crucial 200-day SMA at 1.0851 and the weekly low of 1.0777 (August 1). From here, the low of 1.0666 (June 26) comes ahead of the May low of 1.0649 (May 1).

Looking at the bigger picture, the pair’s uptrend should continue as long as it remains above the important 200-day SMA.

So far, the four-hour chart shows a marginal theme near the upper end of the current range. Initial resistance is 1.1201, ahead of 1.1275. Instead, there is immediate support at 1.1098, followed by the 100-SMA at 1.1035 and the 200-SMA at 1.0953. The Relative Resistance Index (RSI) retreated to around 40.